2018 (10) TMI 1116 - AT - Income Tax

Transfer pricing - proper allocation of expenses - proof of expenses incurred leasing business with AE - Adjustment made in the transaction of purchase of home base segment - The TPO formed a belief that homebase segment was artificially showing higher operating margin of 49%, while the domestic operation was showing loss of 24.13% - Held that - When the accounts are regularly maintained in the course of business, duly audited under the provisions of the Act, free from any qualification by the auditors, they should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. As mentioned elsewhere, the TPO proceeded on a false premise that the appellant has not allocated any expenses to the homebase segment, whereas, as demonstrated elsewhere, not only the appellant has allocated routine expenses, the details were also furnished before the lower authorities. No merits in the additions made in this segment. We, accordingly, set aside the findings of the DRP and direct the Assessing Officer to delete the additions made under home base segment. This substantive grievance of the assessee is allowed. Adjustment made in the transaction of provision of Market Support Services MSS - segment of MSS has been benchmarked by the appellant using TNMM as the most appropriate method - selection of comparable - Held that - Companies functionally different with that of assessee as routine service provider need to be deselected from the final list. Adherence to RPT filter need to be assured. Loss incurred during the year taken as income of the assessee - Held that - It appears that the Assessing Officer, while passing final assessment order, has considered the returned income of the assessee as loss. We, accordingly, direct the Assessing Officer to verify and treat the income as such.

Summary

Issues Involved:
1. Adjustment in the transaction of purchase of home base segment.
2. Adjustment in the transaction of provision of Market Support Services (MSS).
3. Loss incurred during the year taken as income of the assessee.
4. Charging of interest under sections 234A, 234B, and 234C of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Adjustment in the Transaction of Purchase of Home Base Segment:
The assessee challenged the adjustment made by the Transfer Pricing Officer (TPO) regarding the purchase of fixed assets from its Associated Enterprise (AE). The TPO reallocated expenses between the homebase segment and other segments, concluding that the assessee failed to allocate necessary expenses associated with leasing of assets. The TPO proposed a reduction in the price of the fixed assets purchased from LHT (Homebase) by ?78,23,82,084/-. The Dispute Resolution Panel (DRP) upheld the disallowance but provided marginal relief.

The Tribunal found that the TPO proceeded on a false premise that the assessee had not allocated any expenditure to the homebase segment. The Tribunal noted that the assessee had indeed allocated ?1,53,69,969/- as allocable expenses to the homebase segment, which was ignored by the TPO. The Tribunal held that if the Revenue authorities proceeded on a false premise, the conclusion would be erroneous. Therefore, the Tribunal set aside the findings of the DRP and directed the Assessing Officer to delete the additions made under the homebase segment.

2. Adjustment in the Transaction of Provision of Market Support Services (MSS):
The assessee provided MSS to its AE under a Consultancy Agreement and charged costs incurred plus a markup of 9%. The TPO rejected the comparables selected by the assessee and used new comparables, resulting in an upward adjustment of ?29,45,820/-. The DRP reduced the adjustment to ?25,70,348/- by excluding one comparable.

The Tribunal reviewed the inclusion of certain comparables challenged by the assessee:
- APITCO Limited: Excluded as it was functionally different from the appellant company.
- Best Mulyankan Consultants Ltd: The inclusion/exclusion was restored to the Assessing Officer/TPO for verification of Related Party Transactions (RPT).
- Choksi Laboratories Ltd: Excluded as it was engaged in clinical research and had high-value assets, making it not comparable to a routine service provider.
- RITES: Excluded as its consultancy fee to total income ratio failed the filter of more than 75%.
- WAPCOS Limited: Excluded as it provided a wide spectrum of services and had a high gross assets to sales ratio, making it not comparable to a routine service provider.

The Tribunal allowed the second grievance in part for statistical purposes.

3. Loss Incurred During the Year Taken as Income of the Assessee:
The Tribunal noted that the Assessing Officer considered the returned income of the assessee as a loss in the final assessment order. The Tribunal directed the Assessing Officer to verify and treat the income as such.

4. Charging of Interest under Sections 234A, 234B, and 234C of the Income-tax Act:
The Tribunal held that the levy of interest would be consequential and directed the Assessing Officer/TPO to charge interest as per the provisions of law.

Conclusion:
The appeal of the assessee was allowed, and the Tribunal directed the deletion of the adjustments made under the homebase segment, partial relief in the MSS segment, verification of the returned income, and consequential charging of interest. The order was pronounced in the open court on 15.10.2018.